Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Reliance Mortgage Service, Inc at 562 320-0510 to learn more.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.

The majority of ARMs are capped, which means they won't go up over a specified amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. Additionally, the great majority of adjustable programs have a "lifetime cap" — this cap means that the interest rate won't go over the capped amount.

ARMs most often feature the lowest rates at the beginning of the loan. They provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.

You might choose an ARM to get a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 562 320-0510. We answer questions about different types of loans every day.

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